One day you’re celebrating the first day at a new job. The next thing you know, toasts are being raised at your retirement party. Taking action at these important milestones can help you fine-tune your investments, buffer against market volatility and help ensure that life post work is more relaxing than taxing.
10 years out: Revisit tax diversification
At this stage of planning, it’s time to ramp up your savings efforts. It’s also a good time to ask your advisor how you could allocate your savings across three tax-related categories to help manage your tax burden in retirement:
- Tax-deferred: For example, 401(k)1, 2, 403(b)1, 457(b), traditional IRA1, 3, 4, pension plans1, annuities1.
- Tax-free: For example, Roth IRA1, 6, Roth 401(k)1, 6, 529 plan8, municipal bonds7, cash value life insurance5, 9).
- Taxable: For example, mutual funds, brokerage, managed, banking5.
Tax-deferred vehicles like 401(k) plans are important, and by taking advantage of strategies that help spread out tax obligations — such as a Roth IRA or Roth 401(k) — you may be able to diversify your investment portfolio and gain real benefits to income in retirement.
Benefits of tax diversification:
- Keep more of your savings: When you carefully choose the assets you will use to generate retirement income, you could pay less in taxes and as a result, keep more of your savings. This may help your savings last longer.
- Maintain control of your withdrawals: Tax-deferred investments, as well as the Roth 401(k), enable you to choose how much you withdraw to fund your lifestyle — before you begin to take required minimum distributions beginning at age 72 (Roth IRAs are not subject to the required minimum distribution rule, however).
- Adapt for unexpected life events: For example, to pay for unexpected medical costs you could adjust the timing or amount of withdrawals from taxable investments.
5 years out: Bring your retirement goals into focus
As part of ongoing retirement planning, it’s important to understand how you will fund the activities that bring you joy and fulfillment. In the 5 years leading up to your retirement, ask yourself the questions: What’s important to you? What would you like to do with the additional freedom and flexibility in your life?
Here are a few ideas to explore:
- Help someone: Community organizations, nonprofits and churches need volunteers. Local education programs need teachers.
- Be a lifelong learner: Take a class, learn a skill and share your new capabilities with others.
- Create: Painting, woodworking, writing or gardening are just a few options.
- Work: You will meet new people while supporting an effort you truly stand behind. Income is an added benefit.
2-5 years out: Plan for Social Security
Unlike other income sources, Social Security is income you cannot outlive. It also has the backing of the federal government and is protected against inflation.
Deciding when to file for it is a critical step in retirement planning. Although you can start collecting benefits at age 62, you may want to consider delaying, depending on your circumstance. With each year you delay, your overall benefit increases until reaching the maximum amount at age 70.
After choosing a start date to collect benefits, you’ll need to apply online or in person at a local Social Security office. Get more information about when you should collect Social Security
Your advisor can help you evaluate the Social Security benefit options that support your financial goals and factor in your personal situation. In recommending an age to collect benefits, they will consider:
- Varying tax rates on Social Security income
- Capital gains and IRA withdrawals
- Health issues and life expectancy in your family history
Additional steps to consider at this milestone include:
- Maximizing contributions to your retirement plans to meet federal limits
- Paying down unsecured debt, such as credit cards
1 year out: Monitor your expenses
In the 12-month countdown to retirement, it’s important to get an understanding of your monthly expenses. Consider keeping two running lists — either conceptually or literally using separate credit cards and checking accounts — to quantify two types of expenses:
- Essential needs, such as housing, groceries, utilities and health care
- Lifestyle spending, such as travel, hobbies and dining out
After a year you should have a good idea of how much income you’ll need for necessities, with extra money reserved for leisure and other lifestyle expenses.
Review your retirement strategy with your advisor
An Ameriprise financial advisor can help you take the right steps today — before you stop working — to support your retirement income later. Reach out to an advisor to factor tax diversification, Social Security income and lifestyle expenses into your financial picture.